Kothari sees positive changes in M&A market

The recent scale and scope of M&A activity around the region has made for a “pretty cool year” for deal advisers like Rajesh Kothari.

Kothari, the managing director of Southfield-based investment banking firm Cascade Partners LLC, notes a dramatic shift over the last couple of years in the types of capital now targeting companies across Michigan.

“The range of buyers has grown dramatically,” Kothari said. “That’s creating a really robust environment because I can find everything from traditional private equity, to strategics, to private equity-backed strategics, to family offices, to independent sponsors. The plethora of those things didn’t exist the same way at the same intensity even five or seven years ago.”

Cascade Partners’ work over the last year has encompassed a wide spectrum of industries, ranging from transportation and service- based businesses to consumer-focused companies. However, Kothari has been particularly active in health care deals, which earned him recognition as the winner of the 2018 MiBiz M&A Dealmaker of the Year Award in the adviser category.

Rajesh Kothari

Managing Director at Cascade Partners LLC

Business description: Cascade Partners is an investment banking and private investment firm serving entrepreneurs, businesses and investors active in the middle market

Best practices for effective dealmaking: “Focus on objectives before evaluating solutions. Preserve backup options to ensure success. Outline expectations and options and be direct in outlining the implications of those options.”

Personal information: Married to Christie; two children, Sanjay and Priya

Community involvement: Commander of the Michigan Wing Civil Air Patrol, an auxiliary of the U.S. Air Force; board member and chair of the finance committee at Priority Health; member of the alternative revenue task force for Leader Dogs for the Blind; adjunct professor at the U-M Ross School of Business

In that transaction and other health care industry deals, doctors are driven to sell by their desire to focus on practicing medicine while leaving the responsibility of the business operations to someone else, such as a private equity group.

“In (KEA’s) case, they knew the market was changing and for them to continue to be a very strong and successful competitor, they needed more resources,” Kothari said of the deal. “They looked at this as a partnership where they can really do a much better job of both serving their patients and their hospital customers with more resources than a single … small group can provide on their own.”

The motivations in the KEA deal shared several similarities with Grand Rapids Ophthalmology P.C.’s sale to Sterling Partners, a deal Kothari worked on early last year. The deal was named a finalist in the 2017 MiBiz M&A Deals of the Year Awards.

“The physicians are the revenue generator. The problem is that the industry has gone through such transformation in how they run their practice, the economics of their practice, and as a result, the business of being a doctor is a lot different,” Kothari said. “Private equity has been very, very successful in a number of specialties.”

Global health care M&A activity continues on an upward trajectory. Total deals in 2017 grew 28.6 percent, with 265 health carerelated transactions and total disclosed deal value of $42.6 billion, the highest level in a decade, according to an April report from Boston private investment firm Bain Capital.

“As the year progressed, PE funds latched onto the fundamental forces that have long made health care such a compelling investment: an aging population, the rising prevalence of chronic disease, the continuous development of innovative drugs and devices, and a still fragmented and largely inefficient delivery system that is ripe for innovation, disruption and consolidation,” the report’s authors stated.

With private equity and a wide variety of other alternative lenders seeking to deploy billions in capital, Kothari is seeing a shift in the role for M&A advisers, particularly on sell-side deals.

While finding the right suitor and working on deal financials remain top prorities, Kothari said he also must work as an educator and help worried sellers understand what a sale to a private equity firm means.

“I think one of the things that we’ve done very well is (educate) people to understand the implications of these partnerships and what it’s going to mean to them, and how it’s going to affect their lives, potentially, and the lives of their employees and their practices,” Kothari said.

Most commonly, sellers fear they’ll become an “indentured servant” to the private equity firm, he said, noting health care practitioners also worry they’ll be told how to practice medicine. The reality is quite different, Kothari said, particularly given the number of offers many sellers are now getting, which itself provides them flexibility in the dealmaking process.

“For a lot of these guys, this was like, ‘Wow, I didn’t know I had this many options,’” Kothari said. “That’s a change that our clients are seeing and that we’re seeing. While we might’ve presented two or three options before, we’re now presenting five and six options.”

Given the volume of offers and the leverage that gives sellers in the current market, Kothari counsels sell-side clients to be patient and carefully examine all offers to find the deal that makes the most sense for them.

“That hurts us short-term economically, but in the long run, it’s proved to be the right answer,” Kothari said. “We’ve become that trusted partner. (Clients have) a lot of opportunity and a lot of times we’re like, ‘Hey, dude: (That offer) doesn’t really make sense.’”

Most experts tracking the M&A industry project strong deal activity to continue throughout the remainder of the year, with few signs of any sort of slowdown. For his part, Kothari tends to agree, noting he’s still got several deals in the pipeline.

While the ongoing labor shortage and uncertainty over macroeconomic issues such as tariffs create headwinds, Kothari expects the momentum in the M&A market to keep going and prove attractive to sellers.

“You’ve got a strong global economy, which is going to help, and I think everybody is nervous about a recession,” he said. “As long as we’re all nervous about a recession, I think we’re less likely to have a recession.”